Investors seek quicker SEC disclosure on IPOs

RonaldD. Orol

WASHINGTON (MarketWatch) — The Groupon and Facebook initial public offerings prompted advocates for investors to request that the nation’s securities regulator speed up the release of its correspondence with companies on the IPO on-ramp.

But policy experts say the Securities and Exchange Commission is not expected to do what investors want — make that information broadly available before an IPO.

At issue are correspondences that take place between SEC staff and companies seeking an initial public offering. The SEC typically challenges some of the assumptions made by companies as they prepare their prospectus before approving an IPO. Currently, these challenges and the company’s responses – an often lengthy back-and-forth that can be hundreds of pages long – are publicly disclosed 20 business days after the public offering.

But investors may have held off participating in IPOs had they been aware in advance of the red flags the nation’s watchdog had spotted.

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The disclosures weren’t made fast enough, argues Charles Rotblut, vice president of the American Association of Individual Investors.

“Investors have a right to know what is going on and if there are material concerns being raised,” Rotblut said. “These correspondences need to come to light earlier. If the SEC has issues with a company’s accounting statements, retail investors have a right to know.”

Reuters

Facebook CEO Mark Zuckerberg

Rotblut pointed to the differences between the SEC and Groupon over the daily online deal company’s accounting procedures as an example of the kind of disclosures he believes should be made earlier.

SEC spokesman John Nester acknowledged that observers have asked from time to time whether the correspondences could be made before the IPO. However, he said that publishing comments before a security prices “may not be practical because it could prove misleading to investors, disruptive to capital formation, or both.”

Some familiar with the IPO process agree.

Sanjay Shirodkar, an attorney at DLA Piper in Washington, said that a decision to make correspondences public in the middle of the back-and-forth talks between the two sides would be disruptive. He said that investors and the media could take a particular question or answer out of context, perhaps by tweeting a short part of one of the SEC’s questions. He added that in many cases the company can clarify why it chose a particular approach in response to a question that some observers might find disconcerting.

Brian Lane, former chief of the SEC’s division of corporate finance, said having the correspondences before that offering takes place may frustrate underwriters and companies who believer that any delay between SEC clearance and the IPO sale is problematic.

“People understand today that the IPO markets are fragile,” said Lane, now a partner with Gibson, Dunn & Crutcher in Washington. “Something happening in Spain, for example, could close the window for a successful IPO”

Earlier look

Columbia Law School Professor John Coffee said that greater transparency is generally in the public interest and that both companies seeking to access the public markets and SEC officials have their own reasons for wanting to delay making the exchanges public.

“The fear from the IPO company perspective is that deep down that disclosure might reveal where there were several close questions that the SEC was talked out of having to be disclosed,” he said. “If you see that the SEC got less than everything they were looking for that could be embarrassing for the agency.”

Real-time disclosure could make the conversation between the SEC and company much more formal because firms would know that every comment could be scrutinized by the public. This would make it difficult for the SEC to compromise with a firm, Coffee said.

“Companies would be nervous that if SEC had to disclose the information in real time it would be hard for the agency to back down from a request they had made,” Coffee said.

Bankers are split. Carter Mack, president of boutique investment bank JMP Group, said he is supportive of earlier disclosure.

“It would be more effective if investors could see it before the IPO prices,” he said.

But Brett Paschke, head of equity capital markets at William Blair & Co. in Chicago, said he does not think disseminating the correspondences much earlier would benefit the public much. He added that if there is an issue it is reflected in the final IPO documents. “The final prospectus is the result of the back and forth of the discussions.”

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